Visa Inc (V) F3Q 2013 Results Earnings Call July 24, 2013 5:00 PM ET
Jack Carsky - Head, Global Investor Relations
Charlie Scharf - Chief Executive Officer
Byron Pollitt - Chief Financial Officer
Andrew Jeffrey - SunTrust
Dan Perlin - RBC
Don Fandetti - Citigroup
Chris Brendler - Stifel
Tien-Tsin Huang - JPMorgan
Glenn Greene - Oppenheimer
Craig Maurer - CLSA
Tom McCrohan - Janney
Moshe Katri - Cowen
Arvind Ramani - BNP
Smittipon Srethapramote - Morgan Stanley
Rod Bourgeois - Bernstein
Dave Koning - Baird
James Friedman - Susquehanna
Darrin Peller - Barclays
Welcome to Visa Incorporated Fiscal Q3 2013 Earnings Conference Call. All participants are in a listen-only mode until the question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.
I would now like to turn the conference over to your host, Mr. Jack Carsky, Head of Global Investor Relations. Mr. Carsky, you may begin.
Thanks Brad. Good afternoon. And welcome to Visa Inc.’s fiscal third quarter 2013 earnings conference call. With us today are Charlie Scharf, Visa’s Chief Executive Officer; and Byron Pollitt, Visa’s Chief Financial Officer.
As always, this call is currently being webcast over the Internet. It can be accessed on the Investor Relations section of our website at investor.visa.com. A replay of the webcast will also be archived on our site for the next 30 days. A PowerPoint deck containing highlights of today’s commentary was posted to our website prior to this call.
Let me also remind you that this presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements are not guarantees of future performance, and as a result of a variety of factors, actual results could differ materially from such statements. Additional information concerning those factors is available on the Company's filings with the SEC which can be accessed through the SEC's website and the Investor Relations section of the Visa website.
For historical non-GAAP or pro forma related financial information disclosed in this call, related GAAP measures and other information required by Regulation G of the SEC are available in the Financial and Statistical Summary accompanying our fiscal third quarter press release. This release can also be accessed through the Investor Relation section of our website.
With that, I'll now turn the call over to Byron.
Thank you, Jack. Let me begin with my usual call outs and observations. First, some color on the third quarter’s 17% net revenue growth. It is important to note that this growth rate benefited from the absence of significant one time client incentives incurred in the prior year. without these one time client incentives, revenue growth for Q3 would have been closer to 14%. That said, payment volume growth was broad based globally for the March quarter and we're seeing double-digit growth rates in the June quarter for both credit and debit on a constant dollar basis. Based on these trends, and with three quarters of the fiscal year now on the books, we are raising full year 2013 revenue guidance from to low double-digits to around 13%.
Second, service revenue, though up 7% on year-over-year basis, it was down sequentially from the fiscal second quarter. This was primarily due to the signing of the 10 year Chase deal which was executed in fiscal Q3 but was retroactive to the beginning of Q2. This contract, as discussed on the Q2 earnings call, disproportionately impacted the service revenue line and resulted in offsetting reductions in gross service revenue and related client incentives. Because it was signed in fiscal Q3, the service revenue impacts for both Q2 and Q3 were recorded in the current quarter. This means that Q4 service revenue growth rate should be a more representative indicator of underling growth.
Third, client incentives for the quarter, as a percentage of gross revenue, were 14.8%. As described previously, two quarters of Chase related incentive reductions were booked in Q3. This impact was constant inflation in our most recent full year guidance and we remain comfortable with client incentives as a percent of gross revenue in the 16% to 17% range for the full-year 2013.
Fourth, now that we have fully left implementation of the Dodd-Frank routing rules, beginning in June, quarterly Interlink payment volume growth has turned positive for the first time in over a year. Going forward as we lapse a period during which Visa’s post Dodd-Frank debit strategies took hold, we would expect healthy but moderating revenue growth rates for U.S. debit.
Fifth, given our earnings result year-to-date and our expectations for the fiscal fourth quarter, we are increasing our fiscal 2013 adjusted EPS guidance from around 20% to the low 20s. Lastly, as we remain commitment to returning excess cash to our shareholders, during the quarter we’ve spent approximately $1 billion to repurchase 6 million shares at an average price of approximately $177.00. this leaves $61 million remaining in our prior authorization. And as we announced earlier, our Board recently authorized a new $1.5 billion share repurchase program which will run through July of 2014.
Now, let's turn to the numbers. As is our practice I will cover our global payment volume and process transaction trends for the fiscal third quarter, followed by our results through July 21 st . I’ll then cover the financial highlights of our fiscal third quarter and conclude with our guidance outlook for the balance of fiscal 2013 and fiscal 2014.
Global payment volume growth for the June quarter, in constant dollars was 18%. Payment volume growth for the June quarter incomes in dollars was 13% above the March quarter's 9%. This was driven by sustained growth in all of our regions including the U.S. which saw some incremental benefit from the lasting effects associated with U.S. debit regulations.
More recently, in the U.S., through July 21, payment volume growth was 10% compared with 11% in the June ending quarter. Drilling down further, U.S. credit growth of 10% held at Q3 levels while debit, which also grew at 10% experienced a healthy but moderating growth rate as we lap the growing impact of the Visa's U.S. debit strategies.
Global cross-border volume delivered a solid 11% constant dollar growth rate in the June quarter which compares to a 10% rate in the March quarter. The U.S. grew 9% and the rest of world 12%. Through July 21, cross-border volume on a constant dollar basis grew 7% with the U.S. growth rate of 9% and the rest of world at 6%.
The slowing growth in July is most pronounced outside the U.S. and we believe is due in large part to the timing of Ramadan versus last year. Based on historical travel patterns, we estimate the Ramadan impact to be in the 250 to 300 basis points range for the month and if pass this prologue, we should see a bounce back in August.
Transactions processed over Visa's network totaled $15 billion in the fiscal third quarter, a 14% increase over the prior year period. The U.S. grew 12% while the rest of world delivered 23% growth. We have now fully lapped the negative impacts associated with U.S. debit regulation. Through July 21, process transaction growth was a positive 14%.
Lastly, please note that in our operational performance data pack, that was released with today's earnings results, we updated the cash volume in our LAC region to account for several quarters of underreporting by one of our largest issuers in Brazil. As a reminder, these cash volumes have no impact to our revenue.
Now, turning to the income statement. Net operating revenue in the quarter was $3 billion, a 17% increase year-over-year driven by solid growth globally in both domestic and international transactions and as mentioned earlier, aided by significant non-recurring incentives in the prior-year quarter. Currency hedging resulted in only a modest foreign exchange headwind on net revenue in the quarter. Looking ahead, after factoring in our hedging program, we anticipate continued headwinds in the next fiscal quarter and for fiscal 2014.
Moving to the individual revenue line items, service revenue was $1.3 billion, up 7% over the prior-year period. On a sequential basis, growth was negatively impacted by the Chase agreement which as I previously outlined, resulted in lower service revenue offset by a lower level of incentives paid to Chase.
Data processing revenue was $1.2 billion, up 15% over the prior year's quarter based on solid growth rates in Visa, process transactions inside and outside the U.S. and strong cyber storage transaction growth. With the full lapping of the implementation of U.S. Debit Regulation, data processing revenue growth is now relatively on par with process transaction growth.
International transaction revenue was up 14% to $854 million reflecting solid strength in cross-border volume and some modest benefit from higher currency volatility. As I highlighted earlier, client incentives as a percentage of gross revenue for the quarter came in at 14.8%, positively impacted by the Chase deal.
That said, we anticipate a meaningful step-up in both incentive dollars and the percentage rate in Q4 due to anticipated deal activity both domestic and international which should put us within our 2013 guidance range of 16% to 17%.
Total operating expenses for the quarter were $1.2 billion, up 9% from the prior year adjusted results. This was primarily due to higher costs associated with investments in our growth strategy.
Marketing expenses were up 4% from the prior year and stepped up from the prior quarter as we increased marketing to support a number of sponsorship campaigns including the 2013 FIFA Confederations Cup in South America and the 2014 Sochi Winter Olympics.
Operating margin for the quarter was 61% and is consistent with our current guidance. Our effective tax rate for Q3 was 33.2% while higher than our full year guidance of 30% to 32%, the year-to-date figure of 31% is tracking to that range.
Net income at $1.2 billion was up 16% over the prior year adjusted results. Fully diluted EPS was $1.88 for the quarter, up 20% over prior year adjusted results. Stronger than anticipated revenue and more aggressive share repurchases were key drivers and as noted earlier our full year adjusted EPS guidance is now low 20s.
Capital expenditures $122 million in the quarter and continue to be in line with our full-year expectations. At the end of the June quarter, we had 645 million shares of Class A common stock outstanding on a S converted basis. The weighted average number of fully diluted shares outstanding for the June quarter totaled 651 million.
Finally, in terms of guidance, other than our refinement of full-year 2013 revenue guidance to around 13%, and adjusted diluted earnings per share growth to the low 20s, all other outstanding guidance metrics for the full-year fiscal 2013 and 2014 remain the same.
And with that, I’ll turn the call over to Charlie.
Thank you, Byron, and good afternoon everyone. First of all, I just want to reiterate that we feel very good about our performance this quarter. There is very little new news in the underlining revenue trends as Byron has just described, which means that we continue to see broad based growth geographically and also by product. And these are at growth rates consistent with what we’ve seen in prior quarters.
People often ask us about what we see in the economy and what I guess we can say is we don’t see meaningful changes to the path of the economic recovery. And while accelerating and certainly a more broad based recovery would be beneficial to us and our clients, we do continue to feel very good about our business and our ability to deliver strong results in the current economic environment.
We did host our Investor Day on June 6 th and I want to thank all those who attended both physically and listened in. we know it was a lengthy call but hopefully you found it productive. We certainly appreciate all the feedback that we received. Just a couple of quick reminders of some of these important themes that we covered.
First of all, you know, we feel great about the strong foundation that this company has been built on. There has been strong historical growth. We have great partners and the company has a tradition of innovation. Second, the macro trends have and will continue to provide tailwinds. The opportunity to move transactions from cash to electronic means is still huge. And we believe we’ll be there for years to come. This is true in both the developed and the developing parts of the world. As you pointed out on Investor Day, we have 22% share TCE in the emerging, I’m sorry, within the developed markets and 9% in the emerging markets. So there is still much room to grow. In addition to us growing along with the growth of TCE across the world.
We love our core network. It’s served us well and think it provides us tremendous opportunities to leverage and grow our business. Historically, what’s really benefited us has been the global acceptance, the network reliability, safe and security and soundness, and our risk related tools are just a huge value added component to the network. While we continue to build on these historical strengths as we pointed out at the Investor Day, the future for us will be about using the network is a tool, to continue to create more value for issuers, acquires and merchants, and that include us building broader capabilities but also giving them access, it’s our network as a device that connects to them together.
Third, the company has and continued to make huge investments in the future. We walk through some of the additional spending that’s been done to the tune of an additional $700 million versus prior years, which are for the most part all geared towards growth opportunities.
And lastly, we talk about our evolving rules and practices, recognizing how the payments world is evolving. We recognize the needs to evolve our company. But we also feel strongly that we need to continue to preserve some core principles, those include the importance of the Visa brand, the safety, security and soundness of the payment system that we continue to protect and control our intellectual property, and that we enable clients of all sizes to compete. So in short, these of things that while we think we can continue to do more and more for all of our clients we think these things could also add value to the Visa network.
We turn now to little bit of an update on some of the regulatory and litigation items that are both been in the news and we’ve spoken about. First of all in the United States on the MDL case. The deadline for the opt outs was May 28th. As expected I am sure you show lawsuits that were filed against Visa, MasterCard and in some cases the banks from retailers which opted out of the merchant settlement agreement last year.
The final figures are still being calculated but our estimate of the opt out is that they represent slightly above 25% of our U.S. credit volume. We continue to expect approval from a core sometime in the fall.
I do want to stress that these are proceedings that have been on going for a long period of time. We remain committed to figuring out how to work with merchants of all sizes to resolve all of our differences amicably and we as you heard from us we are focused on finding new ways to work with them in conjunction with acquires and issuers to support all of the individual constituents growth objectives.
Secondly, Canada, yesterday Canada’s competition tribunal issue this decision to dismiss the competition bureau’s case and uphold our no surcharge and Honour All Cards rule. We have and we’ll continue to engage with legislators and regulators around the world to promote the understanding of a value of electronic payments to consumers, merchant and governments broadly.
Let me now turn to Europe, and as a reminder, Visa Inc. and Visa Europe are separate independent operating companies. First of all, let me talk about, in May we alerted you to a European Commission inquiry by the Director of General Competition related to inter-regional credit interchange rates.
That investigation specifically relates to the interchange applied to transactions between a non-European Union cardholder and the merchant located within the European Union. We continue to assess their claims and we are working in a productive and professional manager with them and hope to reach resolution but there is nothing more to report at this time.
Separately, the European Commission earlier today released proposed legislation for the payments industry in the European Union which had been expected. The proposed regulation covers a wide range of topics related to the European payments industry including domestic and intra-EU cross-border interchange rates, [co-batching] requirements, process requirements and point-of-sale rules such as Honour All Cards.
Most recent announcement submission appears to address issues similar to the Commission competition case, but the propose regulation would only applied to transactions when the issuer and an acquirer are located in the European Union.
We understand that proposed legislation is to beginning of what we expect could be a long process which could take 18 to 24 months. We’ll continue to keep you updated if we learn of any more developments in either these two proceedings.
Also in Europe, I’m sure we would get a question about the Visa Europe put and there is no update on that.
Let me move now and just talk for a second about a topic which has lot of you are writing about and has gotten a lot of press and that’s tokenization. And to start with, stating the obvious which is we all know that transactions are increasingly moving to digital card, not present channels due to the growth of web commerce, mobile and digital wallet.
As you’ve heard from us in the past we’ve been building our capabilities to deal with transactions like this both technically and through our rules and requirements, V.net and CyberSource are just two examples where we’ve made significant investments to build capabilities in this space. And as we talk about tokenization I do want to just make a point that tokenization is not a new concept to us. Historically, we define the 16-digit account number [method] set and we effectively operate as tokens in the payment system today.
The reality is the development of digital commerce and related risks makes the evolution of these existing tokens -- the evolution of these existing tokens to a more secure form very necessary in a way that works both in the physical and the digital worlds. We need to eliminate the flow of sensitive data that might be vulnerable to a breach and new entrance into the payment ecosystem has also brought into question whether the appropriate information will continue to flow between merchant, acquirer, issuer and consumer. And rightly so, the entire payments industry is focused on this.
You read earlier this month about efforts that the Clearinghouse has underway with its 22 U.S. banks to do some work on this topic as well. We believe that we play a critical role in helping define the standards for token implementation broadly. We're working closely across the entire payment ecosystem defined very broadly to do this. This is an area where everyone needs to work closely together and it’s paramount that we ensure transparency, security, and integrity so that the integrity of the payment system remains. Successful tokenization initiatives must also be interoperable and standardized and do several very important things.
Number one is they need to deliver value to all stakeholders, that includes issuers, consumers, merchants, acquirers, payment gateways, and everyone involved in the digital commerce platform. It’s got to be standards based, technology agnostic such that a tokenization solution builds on the existing open nature of the payments industry while also aligning with emerging payment innovation systems mobile and digital wallets. As I said before, it needs to deliver at least the same level as transparency and reliability that exists today. And equally important it needs to address the needs of everyone globally, not just in the United States.
As I said before, we're committed to working on this broadly with all of our partners. it’s something that we are working on and we feel very good about the progress that we're making with our partners on this one.
In conclusion, I just want to also talk about the repurchase program that Byron mentioned. It’s the ninth share repurchase program that the Company has authorized, since the IPO, our Board of Directors has authorized over 11 billion in share repurchase programs. And as we’ve talked about I think almost on every call and at the Investor Day since I’ve joined, we remain committed to returning excess cash to shareholders both through repurchase programs like this as well as further dividend increases. So, you know, having been here for nine months, as I commented at Investor Day, I remain more bullish as each day goes on when we look at the opportunities that exist in the industry and the assets and the ideas and the people that we have at Visa.
So with that, operator, Byron and I are ready to take any questions that are out there.
Earnings Call Part 2: